1. F2:Management Accounting

2. Designed to give you knowledge and application of: Section E: Budgeting & standard costing E2. Functional budgets E4. Basic variance analysis under absorption and marginal costing E5. Reconciliation of budgeted profit and actual profit

3. Learning outcomes  Calculate the following variances [1]  Sales price & volume  Materials total, price & usage  Labour total, rate & efficiency  Variable overhead, total expenditure & efficiency  Fixed overhead, total expenditure & where appropriate volume, capacity & efficiency  Interpret all the variances explained above.  Describe the inter-relationships between the variances discussed above and calculate actual or standard figures where the variances in the above learning outcome are given. [1] E4: Basic variance analysis under absorption and marginal costing

4. Variance is the difference between the standard costs / revenues and actual costs / revenues i.e. deviation from standards Purpose of variance analysis Cost control & performance evaluation 1.Calculate the following variances: i.Materials total, price and usage ii.Labour total, rate and efficiency iii.Variable overhead total, expenditure and efficiency iv.Fixed overhead total, expenditure and, where appropriate,volume, capacity and efficiency v.Sales price and volume 2.Interpret all the variances in 4 (a) Variance may be favourable or adverse

5. When: Actual cost > Standard Cost Variance is adverse When: Actual sales < Standard sales Variance is adverse When: Actual sales > Standard Sales Variance is favourable When: Actual cost < Standard Cost Variance is favourable Effect of variance (cost & sale variance)

6. Sales price variance (SPV) Under absorption costing Under marginal costing (Standard selling price per unit) (SSP) – Actual selling price per unit (ASP)) x Actual quantity sold (AQS) (Standard contribution margin (SCM ) – Actual contribution margin (ACM)) x Actual sales volume (ASV) Sales volume variance (SVV) Under absorption costing Under marginal costing (Budgeted sales quantity– Actual sales quantity) x Standard profit per unit (Budgeted sales quantity– Actual sales quantity) x Standard contribution per unit Calculation of variance under absorption & marginal costing Refer to Example on page E4.7

7. Example Actual sales price per unit $1.4 Standard sales price per unit $1.2 Actual quantity sold 20,000units Sales price variance = (Standard sales price – Actual sales price ) x Actual quantity = $(1.2- 1.4) x 20,000 = 4,000 (F) Note: Merely calculating variance is not sufficient you need to write whether it is favourable or adverse. Being actual sales are more than the standard, therefore variance is favourable

8. StandardActual Sales (units) 10001,050 Sales price per unit $23$21 Variable cost of sales per unit $16$15 Margin per unit $7$6 Total fixed cost $2,000$2,300 Example Pick and Pack Plc wants to calculate the sales variances based on the information provided (both under absorption costing and marginal costing) 1. Sales price variance = (Standard selling price per unit – Actual selling price per unit) X Actual quantity sold. = ($23 - $21) x 1,050 units = 2 x 1, 050 = $2,100 (A) 2.Sales margin price variance = (Standard contribution margin – Actual contribution margin) x Actual sales volume = ($7 - $5) x 1050units = 2 x 1,000 = $2,100 (A) ACPU =ASPPU - SVCPU Continued…

9. 3. Sales volume variance = (Standard sales quantity – Actual sales quantity) x Standard profit per unit = (1,000 units – 1,050 units) x ($5) (W1) = 250 (F) 4. Sales margin volume variance = (Budgeted sales quantity – Actual sales quantity) x Standard contribution per unit = (1,000 – 1,050) x $7 = $350 (F) Working: (W1) Calculation of standard profit per unit = Budgeted sales price per unit – Per unit cost = $23 – ($16+ $2,000/1,000 units) = $5 Continued…

10. Material price variance Labour rate variance Variable overhead expenditure (SP – AP) x AQ (SR - AR) x AH (SVOR – AVOR) x AH Fixed overhead expenditure variance Budgeted FOH - Actual expenditure on FOH Price variance Fixed Overhead volume variance Quantity variance Material usage variance Labour efficiency variance Variable Overhead efficiency variance (SQ - AQ) x SP (SH – AH) x SR (SH – AH) x SVOR (BH – SH) x FOAR Variance analysis SP = Standard price, AP = Actual price AQ = Actual quantity, SQ = Standard quantity SVOR = Standard variable overhead rate SH = Standard hours, AH = Actual hours SR = Standard rate, AR = Actual rate AVOR = Actual variable overhead rate Continued…

11. FOH efficiency variance FOH capacity variance (SH for actual production - AH worked) x FOH absorption rate (Budgeted hours – Actual hours) x FOH absorption rate Fixed overhead volume variance Example From the following information calculate material total, material usage and material price variances Standard Direct material (10kg @ $5 per kg) Actual Direct material (9kg per unit @ $5.5 per kg) Actual production 10,000 units Material price variance = (Standard price – Actual price) x Actual quantity = $(5 – 5.5) x 90,000 = 45,000 (A) Material usage variance = (Standard quantity for actual production- Actual quantity) x Standard price = (100,000 - 90,000) x 5 = 50,000 (F) Material total variance = Standard materials cost for actual production - Actual materials cost = (100,000 x $5) – (90,000 x $5.5) = 500,000 - 495,000 = 5,000 (F) OR Continued…

12. Direct labour rate variance = (Standard wages rate per hour – Actual wages rate per hour) x Actual labour hours = $(4.5 – 5) x 15000 = 7,500 (A) Standard Direct labour (2 hours @ $4.5 per hour Actual Direct labour (1.50 hours per unit @ $5 per hour) Actual production 10,000 Direct labour efficiency variance = (Standard labour hours for actual production - Actual labour hours worked) x Standard wages rate per hour = (20,000 – 15,000) x $4.5 =22,500 (F) Direct labour cost variance = Standard direct wages for production - Actual direct wages paid = (20,000 x $4.5) – (15,000 x $5) = $90,000 – $75,000 = 15,000 (F) OR Direct labour cost variance = labour rate variance + labour efficiency variance = 7,500 (A) + 22,500 (F) = 15,000(F) Material total variance = Material price variance + Material usage variance = 45,000 (A) + 50,000 (F) = 5000 (F)

13. RECAP  Calculate the following variances?  Sales price & volume  Materials total, price & usage  Labour total, rate & efficiency  Variable overhead, total expenditure & efficiency  Fixed overhead, total expenditure & where appropriate volume, capacity & efficiency  Interpret all the variances explained above?  Describe the inter-relationships between the variances discussed above and calculate actual or standard figures where the variances in the above learning outcome are given?